Investment

It doesn’t matter if you have a finance background or not. When you decide to use fundamental analysis, you can be your own stock portfolio analyst. Instead of just following your instincts, you can use this form of analysis to reach your goals and be successful.

Technical vs. Fundamental Analysis

Investors use two forms of analysis to determine their future investing prospects: fundamental and technical analysis.

The fundamental one takes the company’s corporate health into account. By using it, you will determine the stock’s real value and if it’s worthy of your time. Meanwhile, technical analysis does the exact opposite. Instead of looking at fundamentals, it tries to find out how the market will affect the stock’s progress.

Many investors, including the well-known Warren Buffett, have built their wealth by using fundamental analysis. Investing in unhealthy companies has never been their thing – so why should it be yours?

Business 101

Before delving further into the matter, you have to know a thing or two about business. More specifically, you should know what financial statements are. The three main ones are the balance sheet, income statement, and statement of cash flows. Without these, you won’t be able to assess the overall health of the company.

Think of it this way – a doctor cannot know what’s wrong with you if he doesn’t have your bloodwork. It’s the same with companies and financial statements. They have all the essential details you have to consider before investing.

The income statement tells you how much profit the company has actually made by subtracting the expenses from the revenue. Meanwhile, the balance sheet creates a comparison between the company’s assets and the stockholders’ equity and liabilities. The point is to have them balance each other – that’s where it gets its name from. Finally, the statement of cash flows tells you more about the company’s spending habits. It lists all the activities the company has spent money on (for example, operating costs).

These are crucial if you want your analysis to be successful. However, you cannot just use numbers to determine if an investment is worthy of your money. You also have to take qualitative information into account.

Hence, you should read the company’s annual report. It’s available to the general public, and you can read all about the company’s performance there. You will also find out more about its future endeavors.

You shouldn’t take this data lightly. It’s a chance for the management to explain why the numbers are high or low. Also, you can find out what you can expect from the company in the future.

A Word or Two About Performance

When it comes to performance, the stock price doesn’t really affect it – at least not when you’re doing fundamental analysis. Moreover, when deciding if a company is healthy or unhealthy, its performance plays a vital role.

You can use a variety of metrics to evaluate the performance. For example, if you want to know more about the company’s overall performance, you should look at the earnings. Meanwhile, if you want to see how certain assets have performed, then you have to look up these specific assets (for example, return on assets).

Some of the most useful metrics include price-to-earnings ratio and the gross margin. In addition to that, you should also check out the company’s earnings per share metric.

How to Compare Companies

It’s vital to know that companies are different, especially if they come from two different sectors. Hence, the results of the performance comparison won’t be absolute if you compare Google to U.S. Steel.

Google has a higher P/E ratio than U.S. Steel. But, that won’t give you much information about the performance. The basic materials sector cannot compete with the P/E of the tech sector, so it’s futile to compare them.

So, you should only use these metrics on companies that are actually comparable. They should come from similar sectors and industries. For example, you cannot compare eBay to the Bank of New York. They are not similar, which means that you won’t get the data you need.

However, you can compare eBay to Amazon or Yahoo!, or Bank of America and JPMorgan Chase to the Bank of New York.

Be a Pro

Day traders are able to generate huge gains fast. However, that’s not the point of fundamental analysis. This analysis allows you to find a fantastic stock, and use the financial advantages of an affluent company to grow your wealth.

The intrinsic value is far more important to fundamentalists than the market value. So, how do you become a pro at fundamental analysis? Sadly, there isn’t a definitive answer to this. It’s all trial and error, and even the most experienced analysts can make a mistake.

But, you can always practice and develop your skills further by benchmarking certain stocks. Thus, you can gain more knowledge about them and analyze the company’s performance. That will take time, but it’s the best way of finding out which “good” fundamentals you should take into account.

Practice it at Home

Here are a few things you can do at home to further develop your fundamental analysis skills:

Pick two stocks – one you like and one you would prefer to stay away from. Look at their fundamentals, use them as the basis, and try to give an honest, objective opinion about both of them. Track their progress for about three months.

Create a checklist and use it every time you’re analyzing a stock. It will be your own cheat sheet, and it should contain all the vital information about the stock in question. For example, all the important numbers and ratios. Thus, you will be able to review this data regularly and make sound decisions about your investments.

Whenever you’re analyzing a stock, compare it to no more than one other company in the same sector or industry. This benchmark will be the first of many you will use during your career, and in time, you will create a mental library of benchmarks. Thus, you’ll probably have great success with fundamental analysis.

There are many sources you can get investment ideas from. You could find an idea in the library, and even in the store that you visit every day. Furthermore, it doesn’t matter if you have enough experience or not. Many investors are searching for individual stocks they can add to their portfolios. However, that sort of quest is sometimes quite tricky, and they don’t even know where to start.

Hence, we’ve compiled a list of four tricks you can use to find investment ideas without too much trouble.

1. Flip through the Standard and Poor’s guides

If you’re struggling, you can always read the financial guides S&P releases every year. There are three of them, and they consist of two pages each. In them, you will get information about 1,500 companies that have different indices: small, mid and large cap.

S&P adds all the necessary information about the companies in their guides. For example, phone numbers, ticker symbols, dividend records, and a short business summary, among other things. You will also get historical data from these guides, which will help you decide if the stocks are a good investment or not.

However, you don’t have to listen to the trading advice S&P gives you in the guides. Instead, you should examine the earnings growth, levels of debt, and the equity rates return in the past couple of years. Then, you can use a simple scratch pad to list all investment ideas you’ve thought of.

Afterward, it would be wise to call the companies and ask for more information about their endeavors. Also, you can always order their annual reports and gain more information about the companies that way.

2. Use the Value Line Investment Survey

If you want to access all the essential facts and figures, you can always use the Value Line Investment Survey. You can subscribe for $500+ and have unlimited access to it. However, if you don’t have the money, just go to your local library – they are bound to have the subscription. Then, you can just read the reports and make a note about the companies you’re interested in.

3. Go to Your Local Store, Mall or Gas Station

You can find incredible investment ideas in places you frequently haunt. Just grab a piece of paper and look for products that might be interesting – for example, Coca-Cola, Hershey’s Chocolate, and Tide. Grab the product and find information about the manufacturer on the packaging.

You can call each company and ask if it’s publicly traded. If the answer is “yes,” then ask them to send you the annual report. They will probably transfer you to a different department (investor relations). Give them your personal details (name and address), and you will get the report free of charge.

4. Ask Your Family

Your spouse and your children probably have a few good ideas as well. If you need an example, then take a look at Peter Lynch. He admitted that his family had given him a few investment ideas.

When his daughter bought a lot of clothes from one store, he began thinking about that store as a potential investment. In addition to that, his wife once bought a pair of pantyhose from L’eggs. Afterward, he decided to invest in Hanes, the manufacturer of that product.